Soaring sugar prices could boost costs

MONTREAL — Canadians may soon have to dig a little deeper to satisfy their sweet tooth as soaring sugar prices are forcing bakeries to consider raising the cost of their delectable delights.

MONTREAL — Canadians may soon have to dig a little deeper to satisfy their sweet tooth as soaring sugar prices are forcing bakeries to consider raising the cost of their delectable delights.

Production shortfalls primarily caused by heavy rain in India and Brazil have pushed world sugar prices to a 29-year high, nearly tripling in the past year.

“A raise in prices is imminent again, I just don’t know when it’s going to happen,” says Penny Nevin, manager of Toronto’s Altitude Baking.

The small neighbourhood bakery is struggling to withstand higher costs for key ingredients such as sugar, flour, vanilla and chocolate.

It was forced to increase prices last year and expects it won’t be able to avoid a hike of at least 20 per cent that’s sure to get a frosty reception from customers.

Unlike large companies that hedge sugar purchases to protect them from price spikes, local stores often have no choice but to jack up prices or accept lower profits.

Already, the bakery has been pushed into difficult choices to maintain staffing levels, Nevin said in an interview.

Cantor Bakery is hoping sugar prices will soon recede, but the Montreal institution expects many in the sweets industry will be forced to increase prices once their sugar contracts expire.

“I think it’s a worry for everybody,” president Bernard Lash said in an interview.

He said medium-sized companies like his that primarily sell to retailers and supermarkets can’t raise their prices as easily as “mom and pop” companies that sell directly to consumers.

Lash questions whether prices aren’t being driven up by speculators on the futures market.

The head of Canada’s largest sugar refiner says most customers will avoid raising their prices unless sugar maintains its current level of about 28 cents US per pound for months to come. A year ago, prices hovered around 11 cents.

Edward Makin of Lantic, which accounts for half of Canada’s sugar sales, said most bull markets in sugar last 18 to 24 months. This one has already lasted for 12 months.

“For the time being there will be minimal impact but clearly as this price continues to hover around these levels then those prices at some point will be passed on,” he said.

Products with higher sugar content such as candy bars will probably face the largest pressure, but Makin doubts there will be much change on grocery shelves for cereals and bread.

Canada consumes 1.2 million tonnes of sugar annually, with 85 per cent being used by institutions.

Price increases is a delicate subject for large food processors. Few were willing to comment at all.

Kraft Canada spokeswoman Lynne Galia said commodity prices, including sugar, are just one of many factors that go into the price of a product. Lower fuel costs and the higher Canadian dollar have helped to offset some of the ingredient cost increases.

“We do not forecast future pricing. We price our products to provide good value to consumers,” she said.

Tim Hortons (TSX:THI) declined to provide details of its commodity costs for competitive reasons. But the doughnut chain acknowledged that high sugar prices have impacted the cost of business for its local franchisees.

“For most of 2009, our restaurants worked hard to hold the line for customers on pricing, despite increased labour costs and commodity costs, such as coffee, sugar and dairy products,” said spokesman David Morelli.

Last year, it raised doughnut and coffee prices by a nickel in most regions and Timbit prices increased by a penny. There was no increase for soups or sandwiches.

Most analysts expect sugar prices may still climb to 30 cents in the coming months before beginning to fall to more normal levels. ICE Raw sugar futures prices peaked at 28.95 cents Thursday before closing the week at 27.53 cents. Futures contracts suggest prices will decrease to about 16.6 cents by 2012.

“The good news is these peaks are short-lived,” says Sandra Marsden, president of the Canadian Sugar Institute.

Despite increased world sugar prices, Canadian food processors still face substantially lower costs than their American counterparts. Subsidies for U.S. farmers have caused American sugar prices to be one-third higher.

Although current prices are high, they are much lower than previous surges in 1980 and 1974. Sugar rose to 41 cents in 1980, equal to more than $1 in today’s currency, and to nearly 60 cents in 1974, Marsden added.

A better picture of sugar prices may come in April when data on the coming year’s cane harvest is disclosed.

High prices should lure farmers to plant more cane or move away from producing ethanol, which will increase supply and push prices lower. The International Sugar Organization expects a small world sugar surplus from 500,000 to one million tonnes in the next crop season.

Higher cane sugar prices are unlikely to have any impact on the price of soft drinks and other beverages which are typically sweetened by high fructose corn syrup.